Wednesday, March 23, 2011

Leicester City’s home defeat against Portsmouth on Saturday might not have definitively ended their hopes of securing a Championship play-off place, but it has certainly put another nail in the coffin. The recruitment of Sven-Göran Eriksson initially looked like a masterstroke, as the Swede inspired a dramatic improvement in the team’s fortunes, including a run of seven wins and one draw after the turn of the year, but Leicester’s surge up the table has virtually ground to a halt in March. However, few leagues are more competitive than the Championship and while there’s life, there’s hope, particularly as the Foxes are still only five points away from featuring in the end-of-season play-offs.

Although Sven’s reputation has been somewhat tarnished in recent times, not least by the miserable experience as director of football at Notts County, the recruitment of a manager with such international pedigree (Benfica, Lazio, Manchester City among others) still represents something of a coup for the East Midlands club. The Swede’s reputation has helped tempt a number of familiar faces into joining Leicester’s promotion challenge, including former England international Darius Vassell and a veritable army of other players on loan, including Nigerian powerhouse Yakubu.

Of course, such an influx of new players can be a double-edged sword: on the one hand, it can improve the quality of the squad, but on the other hand too many changes are difficult to quickly absorb. Despite the fact that every politician now routinely places change at the forefront of his manifesto, it’s not that easy to put into practice, which might help explain Leicester’s current struggles.

"Yak attack"

At least the funding for the new players is an impressive show of commitment from the club’s new Thai owners, Vichai Raksriaksorn and his 25-year-old son Aiyawatt, known as Top, who lead the consortium that bought the club from Milan Mandaric last August. Vichai is estimated to be worth around £115 million, which apparently ranks him 27th on the Forbes list of the richest men in Thailand, but it is Aiyawatt who runs the club on a day-to-day basis. The source of the family’s wealth is the King Power duty free business, which has the monopoly on retail business at Bangkok Airport and signed a three-year shirt sponsorship deal with Leicester just a week before the takeover.

So far, so good, but many fans were uncomfortable with the lack of transparency around the deal, including minor details like how much money the club had been sold for, who exactly had bought the club and what had happened to the club’s debts. In fairness, many of the questions have now been answered with the accounts revealing that 100% of the club was sold to Asia Football Investments including the assignment of all shareholder loans, with the ultimate owner being Vichai through his company K Power Sports Limited (based in the British Virgin Isles). Moreover, the Football League finally ratified the change in ownership in October under their new (presumably more stringent) regulations.

However, the new owners’ objectives are still not crystal clear, at least to this observer. Indeed, in November, Leicester City revealed that there was, in fact, a second major shareholder, namely Cronus Sports Management, owned by Iman Arif, an Indonesian businessman who is prominent in the Asian mining industry and is also a member of the Indonesian Football Federation, which now has 20% of the club’s shares. The remaining 80% stake remains with Asia Football Investments. Of course, the amended ownership structure does not imply any Machiavellian manoeuvres, but it might encourage the detractors to raise a quizzical eyebrow. At least Leicester’s chief executive, Lee Hoos, is a believer, describing the new owners as “the real deal”, and, to be fair, they have certainly put their money where their mouth is to date.

"Meet the new bosses"

Doubts about the motives of the new investors may seem overly cynical, but when it comes to football clubs, the motto is surely, “once bitten, twice shy.” In particular, Leicester City fans don’t have to look too far for empty promises, as Milan Mandaric promised to “take the Foxes back to top flight football” when he came to the club in February 2007, but instead presided over Leicester’s first ever season in the third tier of English football, when they were relegated to League One in 2007/08.

Although Mandaric is clearly a very charismatic individual with an ability to inspire supporters with his ambition and visions of success, his achievements have not always matched up to the fine rhetoric. He often spoke of bringing financial stability to Leicester City, overlooking the inconvenient fact that the club recorded large losses in every single year of his tenure, while spending all of the turnover and more on the wage bill. To his credit, he personally covered Leicester’s funding and has underwritten the club’s losses, but it is difficult to get the specifics on exactly how much money he put into the club.

Certainly, when Mandaric first approached Leicester, his bid was deemed unsatisfactory by several shareholders with one claiming that it did not have “a hope in hell” of succeeding. The highly regarded David Conn of the Guardian suggested that he paid no more than £600,000 for his shares, though he pledged to invest a further £9 million into the club. Importantly, however, he did guarantee debts of around £20 million, including £17 million owed to the US finance company Teachers for the financing of the construction of the Walkers Stadium.

"Put your hands up for Milan"

The man himself said that he “will have failed”, if Leicester were not “in the Premiership in three years”, but being criticised for missing that optimistic target is perhaps a trifle harsh. It is however entirely reasonable to challenge his assertion that “when I leave, the club will be in far better shape than it is now.” Here, the report card is fairly damning: the club is still mid-table in the Championship, while the losses and debts have grown.

Chief executive Lee Hoos begs to differ, arguing that Mandaric should primarily be applauded for bringing new investors to the table. With its undertones of Macbeth, “Nothing in his life became him like the leaving of it”, this is faint praise indeed and raises the awful spectre of Mandaric’s departure from Portsmouth, where the new owners did not exactly work out too well for the south coast club.

At least the auditors have given Leicester’s accounts a clean bill of health for the last two years, which was not the case in 2007/08, when they included the dreaded “Emphasis of Matter” statement, ominously warning, “The financial statements have been prepared on a going concern basis and the validity of this depends on the directors being able to obtain additional funds from the ultimate controlling party to enable the company to continue in business.” To put it simply, there was a risk that Leicester City would go bust, unless the owners stumped up the cash, so Mandaric’s commitment to “stand by the club” was important for its survival.

"No Turkish delight for Darius Vassell"

Long-suffering Foxes fans are no strangers to seeing their club hit financial difficulties, as the club entered administration in October 2002 following relegation from the Premier League, when they were hit by a perfect storm of debts arising from the construction of a new stadium, the collapse of ITV Digital and a high wage bill. The club only escaped from insolvency four months later when ex-player Gary Lineker and a group of local businessmen bought them for £5 million, but creditors received just 10p in the pound, including HM Revenue and Customs, who had to write-off more than £6 million of the outstanding tax bill.

Leicester’s cause has not been helped by the managerial merry-go-round taking place at the Walkers Stadium, despite the 2005 accounts stating, “The appointment of a manager is arguably the most important decision a football can make.” If that were indeed the case, you’d think that they would take a little more care when making such decisions. Incredibly, Eriksson is the fifteenth manager Leicester have had since 2004, though I may have lost count, and is the ninth appointment since Mandaric took the reins. Maybe the board thinks that practice makes perfect, but that has not prevented them appointing some real duds, such as Gary Megson (9 games) and Martin Allen (4 games).

The last two departures beggar belief. Nigel Pearson, the best manager Leicester have had since Martin O’Neill, guided the team back to the Championship and nearly got them promoted to the Premier League the very next season, but his reward for these magnificent efforts was to be effectively forced out of the club. His replacement, Paulo Sousa was sacked after just nine games in charge, the day after Mandaric insisted that his manager should be given more time. Richard Bevan, the chief executive of the League Managers’ Association, complained, “How can a chairman expect to deliver success at a football club when a talented manager is recruited and dismissed within two months?”

It’s not so long ago since Leicester enjoyed some success. After being promoted to the Premier League in 1996 under O’Neill, they finished in the top ten four years in succession and also won the League Cup twice, which meant qualification for Europe. However, things have gone downhill since the departure of the man from Northern Ireland. Peter Taylor’s ill-fated reign is remembered for some truly abysmal transfer purchases, including the dreadful striking partnership of Ade Akinbiyi (£5.5 million) and Trevor Benjamin (£1 million).

After the club was duly relegated in 2002, Micky Adams somehow managed to get the Foxes straight back up, but it was a Pyrrhic victory, as the club did not have the means to survive at the highest level, so they only lasted a solitary season before immediately dropping back down to the Championship in 2004.

"Andy King - Prince of Wales"

Thus, Leicester have been excluded from the riches of the Premier League for seven seasons, though it was a case of “so near, so far” last year, as they finished fifth in the Championship and only lost on penalties to Cardiff in the play-off semi-final. Having got so close, most people must have thought that this would have been the perfect time to build on the season’s efforts. Instead, Mandaric opted to drive Pearson away, before recruiting a completely different manager, Sousa, who decided that he would replace many of the stars with untried foreign players with predictably bad results, bringing us neatly to Sven’s turn to throw the dice.

Despite the fact that so many of the club’s actions are seemingly designed to undermine the team’s performance, the stated objective is still promotion to the Premier League. Last year, this was expressed in a more balanced fashion: “Returning the club to a position of financial and operational stability matched by a sustainable football model that will in turn springboard the club to Premiership status.”

Since then, the strategy would appear to have been modified in favour of gambling on attaining that elusive position in the Premier League, because “retaining a strong football squad to fight for a promotion place limited the amount of sensible cost reduction we could enforce.” Translation: we’re going to over-spend on wages in the hope that the (theoretically) better players will drag us over the finishing line. This has been exacerbated by the flood of loan players, though, to be fair, Leicester are far from alone in pursuing such a policy, as the size of the prize is so vast. It also paid off a couple of years ago when the club bounced back from League One, assisted by a relatively high wage bill (for that division).

Although Mandaric said that his aim was “to return Leicester City to a self-sustaining business”, the harsh reality is that the club’s current business model is almost certain to produce losses, unless they: (a) manage to sell a player for serious money; or (b) gain promotion to the Premier League. The last time that the club made a profit (£1.7 million) was in 2005/06, when its revenue was boosted by the final parachute payment of £6.5 million following relegation from the Premiership.

Since then, Leicester’s total losses for the last four years add up to a frightening £33 million, including the club’s record deficit of £14.2 million in 2007/08, though this was impacted by £4 million of exceptional charges (£3 million for goodwill impairment following the acquisition of the club in 2003 and £1 million for management restructuring).

Last year’s loss of £7.5 million was £1.3 million higher than the previous year, even though the revenue rose nearly 50% from £10.9 million to £16.2 million, as wages increased by £3.3 million to £14.5 million and the profit on player sales fell £2.5 million to £1.4 million. Once again, chief executive Lee Hoos re-iterated the strategy, “Coming on the back of a promotion-winning season in 2008/09, these figures reflect our attempts to capitalise on the momentum generated by our immediate return to the Championship.”

"Richie Wellens shows his battling spirit"

New vice-chairman Aiyawatt Raksriaksorn hinted at a new ethos, “Of course, we don’t want to write off losses every year. We will try to make it break even first. That is the target. Then we will look to make a profit.” Sounds good, but the chances are that the losses will get worse before they get better, as the club spends the additional funding provided by the Thais on bringing in new players, further driving up the wage bill.

To be fair to Leicester (and other clubs of their ilk), they have to spend to remain competitive in the Championship, especially as the revenue at clubs that are relegated from the Premier League is effectively boosted twice, first by the substantial funds they receive while in the top tier, second by the parachute payments. In this way, the Premier League really is the gift that keeps on giving – or at least for another four years, as teams receive a total of £48 million in parachute payments following relegation (£16 million in each of the first two years, £8 million in each of years three and four).

Let’s take Burnley, one of the sides competing with Leicester for a play-off place. Last season, the Clarets’ revenue of £45 million was significantly higher than Leicester’s £16 million, almost entirely due to the difference in broadcasting income (£34 million compared to £5 million), as the revenue from gate receipts and commercial activities was near enough the same. Following relegation to the Championship, Burnley’s projected revenue will still be much more than Leicester, purely due to the £16 million parachute payments. That’s hardly a level playing field, so begins to justify Leicester’s apparently suicidal financial strategy.

This is why people refer to the Championship play-off final as one of the most lucrative matches in world football with the value estimated at £90 million. Even if the promoted club came straight back down, it would receive £40 million TV income plus £48 million parachute payments plus additional gate receipts and commercial revenue. Of course, if it finished higher in the Premier League, the club would receive even more TV money and every season survived adds another £40 million to the coffers. It’s incredible to think that just one place in the football pyramid can make such a difference.

In truth, the financial gap between the Premier League and the Championship continues to grow, which is why clubs are so desperate to reach the promised land of the top division. Of course, it is still possible to do this without risking the financial health of the club, but it’s not easy and many are not willing to patiently wait for players to be developed and a successful team to be built.

The television money in the Championship is mainly sourced from the Football League central distribution of £2.5 million that is made to all clubs, which was increased last season, plus a £1 million solidarity payment from the Premier League. The latter funding was introduced in 2007/08, but it doesn’t really make any meaningful impression on the revenue gap between the two leagues.

Gate receipts increased from £4.5 million to £5.7 million last season, following the return to the Championship, which saw an 18% increase in the average attendance from 20,253 to 23,943, and additional income from reaching the play-offs. This is an impressive demonstration of the fans’ support for their club, especially attracting more than 20,000 in League One, and highlights Leicester’s potential. In fact, the average crowds last year were higher than five Premier League clubs (Fulham, Bolton, Burnley, Portsmouth and Wigan).

"Kyle Naughton - loan star"

This year, the attendances have held up, despite the tough economic environment, averaging 23,623 after 17 matches, which is the fourth highest in the Championship. This was partly due to an early bird scheme for season ticket renewals, which is being repeated this season with a small price increase of £1 per game. Not a huge amount, but I can’t help noting that the new owners had pledged not to raise ticket prices.

The club moved away from Filbert Street in 2002 to the Walkers Stadium, a spanking new 32,500 all-seater stadium. Former shirt sponsors Walkers, the Leicestershire based crisp manufacturers, signed a ten-year deal for naming rights that same year, and the agreement was renegotiated in 2007, when they again paid a “seven-figure sum” to extend the deal until 2017. The new owners have spoken of their desire to rename the ground as the King Power Stadium, but it is not yet clear whether Walkers would be willing to walk away. They have also talked about plans to increase the capacity by nearly a third to 42,000 if they secure promotion.

Arguably, the Walkers Stadium is already Premier League standard, but this is actually a burden at the moment. Lee Hoos explained the problem, “It is difficult in the Championship, because it is a very expensive infrastructure here at the Walkers Stadium and the training ground. It isn’t cheap to operate and what is an asset in the Premier League is a hindrance in the Championship.” Mandaric went further, “Anywhere but in the Premier League, this stadium is a liability financially, because we have a £17m debt that has to be serviced.”

"The theatre of crisps"

Back in 2005, the club announced in its accounts that it was “committed to further expanding its commercial activities”, but this has proved to be easier said than done: retail and merchandising revenue is effectively unchanged (£1.5 million in 2005 and £1.6 million in 2010), while sponsorship and advertising has hardly grown (from £2.5 million to £2.9 million). Income from conferences, banqueting and catering has actually decreased from £3.3 million to £0.9 million, though this is partly due to outsourcing catering to Compass in 2008.

As of this season, the shirts are sponsored by King Power, the owners’ company, in a deal running three years, though no financial details have been divulged. Similarly, there is a new three-year kit deal with Swiss firm BURRDA. Again, no news on revenue, but the club did describe it as “the biggest in Leicester City’s history.”

The new owners have outlined their vision of taking the club to a global market, building on their experience in retail marketing. In fact, one of Sven-Göran Eriksson’s first tasks as Leicester manager was to take the team to play a friendly in Bangkok against the Thai national side. However, it is far from certain that Leicester’s new Asian connections will automatically raise their profile in the Far East. A leading Thai journalist at the Bangkok Post, Wanchai Rujawongsanti, argued, “I don’t think they would be able to become a popular side in Asia. Fans in this part of the world are only crazy about top Premier League sides such as Manchester United, Liverpool, Chelsea and Arsenal.”

On the cost side, the wage bill is the key factor. Wages rose almost 30% last season from £11.2 million to £14.5 million, reflecting the promotion to the Championship. This was exactly the same as the wage bill the last time they were in that division two years ago in 2008 and is actually less than the £17 million they paid out in 2005, so it’s not as if their spending is out of control. The problem is that their revenue is low and has decreased after the loss of the parachute payment, so the important wages to turnover ratio is still of concern. Although this has come down from the high of 103%, it still stands at 89%, which is considerably above UEFA’s recommended maximum limit of 70%., and may well worsen this season, as a result of the new players recruited first by Sousa, then Eriksson.

Even though Leicester have spent relatively big on wages, the same accusation cannot really be leveled at the club with regard to the transfer market. In fact, in the last eight years their net spend has been only £3 million. Even this represents an increase on previous years, when the Foxes made good money from player sales, moving on the likes of Emil Heskey, Neil Lennon and Gary Rowett.

These days, the club’s sights have been lowered, so few big money purchases are made, but equally little money has been received when transferring players. The most expensive signing last summer was Martyn Waghorn from Sunderland at just £3 million, while Sven’s costliest acquisition to date is the uncompromising defender Sol Bamba from Hibernian for a fee of £250,000.

That said, Leicester’s net spend of £2 million over the last two seasons amazingly still leaves them among the highest spenders in the Championship with only seven clubs paying out more. There are three reasons for this apparent anomaly. The first two are fairly obvious: one is that the clubs in the Championship are strapped for cash; the second is that half the clubs in that league have simply sold more players than they have bought.

The other reason for the low spend is more interesting, namely that the use of the loan system has shot up in the Championship this season. Championship rules allow clubs to take up to six players on loan at a time and to include up to five of them in an 18-man match day squad. However, the main driver of the growth is the Premier League’s introduction of a 25-man limit in the size of the squad. Players aged 21 and under are not included in the cap, so logically clubs have taken on more quality young players.

They need playing time, so Premier League clubs are now more willing to loan players, even funding some of the wages during the loan period. This is particularly relevant for leading clubs, who have allowed many of their players to go out on loan to the Championship: Tottenham 9, Arsenal 7, Chelsea 7, Manchester City 7, Manchester United 5 and Liverpool 3.

Many clubs have taken advantage of this trend, few more so than Leicester who have taken an incredible 12 players on loan so far this season, only surpassed by Sheffield United. Some of the more experienced professionals like Roman Bednar, Curtis Davies and Chris Kirkland have failed to make an impact at the lower level, but promising youngsters like Kyle Naughton (from Spurs), Jeffrey Bruma (Chelsea) and Ben Mee (Manchester City) have cemented their places in Leicester’s defence.

However, it is the eye-opening loan signings of international strikers Yakubu (from Everton) and Diomansy Kamara (from Fulham) that really signals the intent of Leicester’s new Thai owners. Although they have not yet provided the funds for any major permanent signings, all these loan players have not come cheap. While some of the wages will no doubt be subsidised by their Premier League employers, this must be having a detrimental effect on Leicester’s wage bill, which the owners have to cover. Yes, some of the loan stars are youngsters, whose salaries are probably not that high, but the sheer quantity of loan players is likely to have greatly increased the club’s costs.

Indeed, the latest accounts specifically mention that since the books closed the new owners have injected a further £10.85 million of working capital into the business by way of parent company loans. This is on top of the £29.5 million net debt reported as at 31 May 2010, so the current borrowings probably amount to over £40 million – or a worrying 2.5 times the club’s annual turnover. In fairness, very little is owed to the banks, as £22 million of this comes from the owners.

The terms of the new loan from the Thais are unknown, but the previous parent company loans of £11 million which they took on are unsecured and non-interest bearing. They are repayable on demand, though Asia Football Investments confirmed that they would not seek repayment of these loans within 12 months of the date of signing the accounts if such payment would prejudice the ability of the club to settle its other obligations, so there is some comfort there.

The other substantial debt of £17 million is connected to the building of the stadium, which is the subject of a hire purchase contract. Interestingly, the repayment terms depend on which division of the football league the club plays in, so presumably promotion to the Premier League would imply higher annual charges. There are also £1.6 million other third party loans, which attract interest at 1.23%, and £0.4 million bank loans, secured on the club’s property, with interest payable at 1.75% above the bank base rate.

The chairman of the Football League, Greg Clarke, who ironically was chairman at Leicester City when the Foxes went into administration with large debts, has warned of the dangers facing clubs, “Debt's the biggest problem. If I had to list the 10 things about football that keep me awake at night, it would be debt one to 10. The level of debt is absolutely unsustainable. We are heading for the precipice and we will get there quicker than people think.” Sobering stuff from a man who has been there, seen the sights and bought the t-shirt.

"La Bamba"

Even so, Leicester’s balance sheet looks reasonably healthy at first glance with net assets of £5 million, but that is largely due to the £41 million value ascribed to the stadium, based on a revaluation performed in 2009. On closer inspection, for amounts falling due within one year, the net current liabilities stand at £21 million, excluding the £10.85 million loans made since the accounts were published.

Of course, the net book value of the players, considered as intangible assets in accounting circles, is significantly under-stated at £3 million, as they are worth significantly more in the real world with the directors’ market valuation of the squad being £16 million. The only problem is that in order to realise that value, the club would have to sell the players, which would leave a few gaps in Sven’s formation.

The fact is that Leicester continue to require funding from the owners to pay for their strategy, as can be seen from the cash flow statement. Large cash outflows have been financed by money from share capital payments and increased borrowing, which has amounted to £20 million in the last four years and is now up to £31 million with the addition of the latest £10.85 million loan.

The issue was neatly encapsulated in the latest accounts: “The directors have determined that whilst the business could continue to operate without obtaining significant additional monies, the achievement of the objective to secure a return to the premiership will require additional funding.” That’s fine from a financial perspective, so long as your wealthy owner continues to pump money in, but nobody has bottomless pockets and Vichai Raksriaksorn has already complained that the consortium has had to invest more than they thought when they bought the club.

The “sugar daddy” model is one that has come to be accepted by football fans everywhere, but it does carry risks if the benefactor one day decides to exit stage left, which could happen for a plethora of reasons. As a pertinent example, the last time a Thai took over an English football club it ended in tears, when Thaksin Shinawatra, the exiled former Thai prime minister, sold Manchester City only a year after he arrived, having fallen out with a certain Sven-Göran Eriksson.

Clearly, not all Thai investors are cut from the same cloth, but a reasonable question might be whether Leicester’s new owners have the wherewithal to fund their dream of getting the club into the Premier League. The £115 million that Raksriaksorn is reportedly worth might be a fortune to the likes of you and me, but it’s debatable whether it’s enough to cover many years of losses at a football club in an era when billionaires are the entrepreneur of choice.

"Diomansy - maybe not forever"

That might explain a growing trend whereby foreign businessmen are increasingly looking to invest in Championship clubs, as they can buy them more cheaply than Premier League clubs, hoping to secure a larger return by funding a promotion to the top flight.

Either way, it’s difficult to fully understand what the owners’ intentions are for Leicester’s future. Chief executive Lee Hoos is convinced that this is a long-term project, “They said they are not here for one year, two or three, they are here for the long run. This is about long-term sustainability for the club.”

On top of that, Mandaric proclaimed that the deal would “strengthen the squad and youth academy by bringing additional financial support and introducing a new global network of contacts and access to player talent”, but Vichai has admitted that the goal of his consortium is “to build Thailand as a football academy for Asia in the future.” A noble objective, for sure, but it’s not clear exactly what implications this might have for the Foxes.

Leicester City is clearly a club with a lot of potential, which is what has attracted the new owners and indeed Eriksson, who commented, “The target for this club is to reach the Premier League, hopefully this year. If not this year, then next year. I think the ambition of the club is fantastic. If they did not have that ambition, then I would not be interested.” And there lies the crux of the matter: what will happen if Leicester are not promoted in the next two years? Will Sven stick around? Will the Thais be happy to cover the inevitable losses if Leicester remain in the Championship?

"Yuki Abe - Leicester's turning Japanese"

As Mandaric once said, “There is no money in football unless you are in the Premier League”, which is why Leicester (and others) try to spend their way to the top. However, this is a risky strategy, as only three teams will be promoted each season. No club has a divine right to be in the top tier, though Leicester are undeniably better equipped than most, as Sven explained, “I think they have everything here: the stadium, the training ground and the fans. There is everything to be a Premier League club. It’s only the table which doesn’t look very good.”

And that’s the point – the team still needs to do the business on the pitch. While promotion might look like a long shot right now, there will be many twists and turns in the dog-eat-dog Championship before the play-off places are decided. If Leicester’s exciting new signings do manage to gel under Sven’s shrewd guidance, then they might just fulfill the dreams of the new owners – and indeed the legions of fans that have followed them through thick and thin.

Wednesday, March 16, 2011

There are many aspects of this season’s Premier League that have made it one of the least predictable for a long time, not least the battle to avoid relegation, which is shaping up for a thrilling finale. Despite memorable home victories against reigning champions Chelsea and league leaders Manchester United, Wolverhampton Wanderers find themselves firmly ensconced in this struggle.

Last season Wolves finished in a very creditable 15th place, which was a superb achievement for the team’s first season back in the top flight after winning the Championship the previous year. In fact, this represented the club’s highest league position in 30 years and was the first time that Wolves had survived a season at the highest level since 1981.

Nevertheless, the club is now experiencing the classic second season syndrome, which has been exacerbated this year by the promotion of more experienced, wealthier clubs like Newcastle United and local rivals West Bromwich Albion. Sixteen defeats in 29 games have left Wolves languishing second from bottom of the Premier League, albeit only two points adrift from safety.

"Kevin Doyle - good bet to score"

Better news for the club came a couple of weeks ago, when chief executive Jez Moxey announced that Wolves had recorded an impressive £9 million profit on their return to the Premier League in 2009/10. On the face of it, the contrast between results on and off the pitch could not have been much starker, but the club’s financial success was not greeted with overwhelming enthusiasm by the fans, as this provided little consolation for being in the relegation zone. Questions were asked about whether some of that surplus should have been invested in a couple more players in the January transfer window in order to give the team a better chance of remaining in the top tier.

In fairness, this is Wolves’ most successful period for quite a while. Since 1984 the club has only spent three seasons in the top flight, one solitary year back in 2003/04 and two including the current season after the 2009 promotion, which marked the West Midlanders’ return to the Premier League after a six-year absence.

Paradoxically, this still feels like a big club, as it has a commendable roll of honour, including three league titles, though all of those came at least 50 years ago, and four FA Cup wins. Wolves were among the founder members of the Football League and were even more influential in the 1950s, when Stan Cullis’s exciting team staged a series of floodlit matches against top European opposition, which arguably paved the way for the introduction of the European Cup.

These days, even though they have played some attractive football this season, Wolves’ dazzling displays have been largely confined to their financial statements. Although it has almost become a truism that football clubs will be burdened by large levels of debt, Wolverhampton Wanderers are a glittering exception to this rule, and they are now in the happy position of being debt-free. In fact, after paying off bank loans of £3 million, the club is the envy of many others, as it is sitting on considerable surplus funds of £26 million, even generating interest for the last three years.

Indeed, Wolves have been in a very healthy financial state ever since Steve Morgan took over in 2007, when he bought the club for a nominal £10 fee from Sir Jack Hayward, though he also had to pledge a guaranteed £30 million investment. This was duly provided by the club’s parent company, W.W. (1990) Ltd, increasing its issued share capital by £30 million, which was fully paid up by Morgan (25%) and his investment company Carden Leisure Ltd (75%), a subsidiary of Bridgemere Investments Ltd, based in Guernsey.

Clearly, the fans owe Hayward a great deal for his generosity, as he wrote off well over £70 million when he effectively gifted the ownership of his beloved club to Morgan. A lifelong Wolves supporter, Hayward stayed close to his roots, even though he became a multi-millionaire running a business empire from his home in the Bahamas. He financed the redevelopment of the Molineux stadium in order to meet new government regulations in the early 1990s and provided a succession of managers with substantial funds to spend on the squad during his 17 year tenure, though he once famously complained that he was being milked like a “golden tit”.

"Sir Jack Hayward - old gold"

In his place, Wolves now have Steve Morgan, the chairman and founder of house builders Redrow, who has been listed as Britain’s 146th wealthiest individual in the Sunday Times Rich List. Despite an estimated fortune of £350 million, Morgan set out his stall early doors after he made the investment into the club, “It is intended that the new capital, over a period of time, will be used to help re-establish Wolves as a Premiership club. Although this is a significant amount of money, there will not be an ‘open cheque book’ approach to signing players. Instead the club will build on the current strategy of steadily and progressively developing a team of young, hungry and talented players.”

So, steady as she goes has been the mantra, which was once again echoed this year by Moxey, “Our financial results reflect the successful balance the Club struck between sound financial management and continuing investment in players and off the pitch infrastructure.” Indeed, the “3Ms” (Morgan, Moxey and manager Mick McCarthy) have placed stability at the centre of their strategy with the entire management team singing from the same song sheet.

Moxey explained their ethos, “We don't press the panic button at difficult times. We stick together as a club. We will show the stability we have had in recent years and look to move the club forward once more.” McCarthy for one is grateful for this support, believing that the backing he has received from the board has played a crucial role in the team’s recent mini resurgence.

"Matt Jarvis - close to an England call-up"

Nevertheless, every strategy needs to set an over-riding objective and Wolves’ is clearly outlined in the accounts, which state that the club’s “primary aim is to retain its Premier League status.” This is eminently understandable, but the lack of investment in new players in January suggests that they are taking a bit of a gamble that the current, relatively cheap squad will be good enough to beat the drop. They certainly have enough money to have purchased, say, a commanding central defender in January, which might just have made all the difference in the crucial last few games.

Funnily enough, you could argue that Wolves gambled financially in the other direction the year before, when they spent almost all of their turnover on wages and recorded a £5 million loss, in an attempt to secure promotion from the Championship. Obviously, that bet paid off handsomely, as Wolves reached the riches of the Premier League, but it could just as easily have failed in that ultra-competitive division.

That said, Wolves’ last few seasons in the Championship were remarkably consistent, at least in terms of financial performance, with the net result remaining in a narrow range of a £3 million profit and £5 million loss, suggesting that this is one club that strives to balance its books.

Therefore, it should probably come as no great surprise that the club made a profit in the Premier League with its far more lucrative TV deal, but the £9 million profit is still worthy of praise, given that only three other clubs have to date announced profits for 2009/10, namely Arsenal, Birmingham City and Burnley, with the rest all revealing hefty losses (though not all clubs have published their results yet for last season).

In fact, Wolves’ cash profit is even higher than the accounting profit with EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) of £21 million, not including profits on player sales of £4 million. Player disposals have not had a major impact on Wolves’ finances over the last few years with the peak year of 2007 only standing at £6 million, largely due to the transfer of Joleon Lescott to Everton. Interestingly, the 2009/10 results were boosted by the sell-on fee received following Lescott’s subsequent move to Manchester City.

Furthermore, the reported profit of £9 million has been held back by an accelerated depreciation charge of £6 million, which was booked as a result of the decision to redevelop Molineux, because this has shortened the economic life of the North and East stands. If this exceptional item were to be excluded, the profit before tax would have been a remarkable £15 million.

So how did Wolves convert a £5 million loss in the Championship to a £9 million profit in the Premier League?

The waterfall chart above explains this very clearly with green columns indicating an improvement in profit, while red columns show a deterioration. Basically, revenue has significantly increased by £42 million, very largely due to the central broadcasting deal, but this has been partially off-set by £28 million higher costs, mainly due to investment in the playing squad (wages and amortisation).

The financial benefits of being in the Premier League are evident with the huge uplift in revenue from £18 million to £61 million. As we have seen, the vast majority (£37 million) of the growth comes from television, but the other revenue streams have also increased. Gate receipts were up 43% from £7 million to £10 million, thanks to average attendances rising from 24,153 to 28,366, while commercial revenue also gained £2 million, mainly due to the enhanced value of the main sponsorship agreement with Sportingbet.

In the Championship, revenue fell from £24 million in 2005 and 2006 to £16 million in 2007, as that was the year that parachute payments following relegation from the Premier League ceased. On the other hand, revenue rose to £18 million in 2008, primarily due to the receipt of a £1.4 million solidarity payment from the Premier League, which was introduced to assist clubs that do not benefit from parachute payments. Revenue was maintained at the same level in 2009, even though the solidarity payment fell to £0.7 million, based on the club’s lower finishing position.

Despite Wolves’ notable revenue growth last season, their annual turnover of £61 million still leaves them in the bottom half of the Premier League in terms of revenue. To place this into context, when Wolves beat Manchester United 2-1 last month, they overcame a team whose revenue of £286 million is nearly five times as much as theirs. That’s a huge difference, especially when it’s repeated every season. That said, Wolves’ revenue does compare favourably with a number of clubs who have successfully competed in the top tier, such as Sunderland £65 million, Birmingham City £56 million and Bolton Wanderers £54 million, so they’re not completely disadvantaged.

Like virtually all clubs in the Premier League, the majority (64%) of Wolves’ income comes from TV, though this is far from the highest dependency with Wigan leading the way at 81%. Again, Wolves’ £39 million is nowhere near as much as the top clubs earn, mainly due to the money those teams earn from the Champions League, e.g. Manchester United receive an incredible £105 million. Almost all of Wolves’ television money comes from the Premier League’s sale of TV rights with the likes of Rupert Murdoch and other media moguls contributing nearly £36 million last season.

The distribution of the Premier League TV revenue is therefore of particular interest to a club like Wolves. Most of this is shared out equally, namely 50% of the domestic rights and 100% of the overseas rights, but not all of the money is allocated in this manner. Merit payments account for 25% of the domestic rights with each place in the final league table being worth around £800,000, which can make a big difference to some clubs. In addition, the remaining 25% of the domestic TV rights comes from the facility fee, which is based on how many times Sky broadcast a club’s matches live. Last season Wolves were shown the guaranteed minimum of 10 times, which was worth £6 million, while Manchester United were broadcast the maximum 24 times, which gave them £13 million.

Given the importance of the broadcasting revenue, the timing of new Premier League deals is particularly meaningful. The latest three-year contract commenced this season and will be worth an additional £7-10 million per annum to each club, largely thanks to the steep increase in overseas rights, once again emphasising the need for Wolves to preserve their place at the top table.

In a way, gate receipts are similar to TV revenue in that they have significantly grown after promotion, but are still not particularly high for a Premier League club at just £10 million. To place that into context, both Manchester United and Arsenal earn over £100 million a year from match day income. It should be noted that gate receipts are not exactly the same as match day income, but any re-classification from Wolves’ commercial revenue would not make a dramatic difference.

Attendances at Molineux have held up pretty well, considering the high unemployment rates in the West Midlands, which has traditionally relied on the ailing manufacturing industry to create jobs. In fact, last season’s attendances climbed 17% to stand at 28,366, which was the 12th highest in the Premier League, only surpassed by Aston Villa among neighbouring clubs, and meant that 97% of the ground’s capacity was filled.

This is particularly impressive, given that Wolves’ ticket prices are among the highest in the country. According to data from Sporting Intelligence, Wolves have the sixth most expensive entry level season tickets, ahead of Manchester United, though it should be acknowledged that most fans take advantage of “early bird” prices, so pay considerably less than the published price. The club also run a number of other pricing schemes to encourage fans, such as the occasional family special (“Wolves 4 Family Football”), which gives a family of four (2 adults, 2 children) entry to Molineux for just £40.

Nevertheless, a survey of football fans last year by Virgin Money suggested that over 50% of Wolves’ supporters were considering not renewing their season tickets, which was only behind the level of discontent exhibited at Manchester United, which is something of a special case due to the Green and Gold campaign against the Glazers, so the pricing strategy is probably not perfect.

"Steven Fletcher - he's a record breaker"

The current season is a bit of a mixed bag in terms of crowd figures. Having increased the capacity to 29,195 by reinstating a temporary stand in the south-west corner of the stadium, Wolves recorded their highest attendance ever at the new Molineux of 29,086 for last month’s 4-0 demolition of Blackpool. On the other hand, the average attendance has fallen 3.6% to 27,346, though Wolves are far from alone in experiencing such a trend, as more than half of the top 12 clubs have suffered the same fate.

In such an environment, it would be a courageous man that announces plans to redevelop the stadium to increase the capacity, but that is exactly what Morgan has just done. The chairman himself described this step as a “brave and decisive leap forward”, but explained the rationale behind the decision, “The aim is to drive the club forwards at all levels and to ensure that we put our team in the best possible position to compete at the highest level. To do that we need the best possible facilities at Molineux.”

Supported by the local council, the plan could ultimately increase the stadium capacity from 29,000 to 50,000, though as you might expect given Wolves’ financial prudence, the project has been broken down into a number of phases to enable the club to “pause and reflect” if required.

"Project Molineux - grounds for optimism"

Phase One is scheduled to begin at the end of the current season with the redevelopment of the Stan Cullis (North) Stand. A new two-tier stand with 7,700 seats, including new corporate facilities, a megastore and a museum will be built in its place and should be open for the start of the 2012/13 season, increasing Molineux’s capacity to 31,700. This will cost £16 million, but will be funded from existing cash flow, so no additional debt will be taken on, but might provide an explanation of why the club’s profits are apparently being hoarded, especially as there will be revenue shortfalls with capacity dropping to 23,995 during the construction.

Phase Two will see the Steve Bull (East) Stand being rebuilt over a two season period (2012/13 and 2013/14), scheduled to be ready for the start of the 2014/15 season, increasing the capacity to 36,000 and taking the total project cost to £40 million.

"George Elokobi - a big old unit"

Subject to league position and supporter demand, Phase Three would add a top tier to the Jack Harris (South) Stand, growing capacity to 38,000, but this stage has not yet been costed. Plans have also been drafted for a potential Phase Four, when the Billy Wright (West) Main Stand would be completely redeveloped, increasing capacity to a magical 50,000.

The main objective is clearly to generate more revenue, not just through more bums on seats, but an expansion in the number of corporate boxes, a new banqueting hall and seminar rooms. The hope would be to replicate the Emirates effect, which has increased Arsenal’s match day income from £44 million in their last season at Highbury to around £100 million today. However, there are other advantages too, as an increase in capacity will give the club a better chance to attract the fans of the future by offering reduced price tickets to children and more family days than they can at present. This is smart thinking, as once a club has got a fan (customer) hooked, it’s unlikely he will switch his allegiance at a later date.

"Stephen Hunt - hair we go"

Of course, it’s not as easy as that, otherwise all clubs would be redeveloping their grounds, and there is normally a price to pay for investing in the infrastructure. Although Morgan has stated that the project will not be at the expense of sensible investment in new players, there has to be some concern that this will be a difficult balance to get right. It’s no coincidence that Arsène Wenger’s parsimonious policy started after the move to the Emirates and the consequent substantial increase in Arsenal’s debt.

There also have to be some misgivings over whether the full grandiose plan would come to fruition if the unthinkable were to happen and Wolves were relegated. Chief executive Jez Moxey has claimed that retaining Premier League status was never a “must” for the project to go ahead, but I somehow doubt that it would progress much beyond Phase One if the club were to find itself in the Championship.

Wolves have also done reasonably well in commercial revenue, managing to grow both their deals for shirt sponsorship and kit suppliers. Although their revenue of £11 million is a long way behind the “Sky Six” (Manchester United, Arsenal, Chelsea, Liverpool, Manchester City and Tottenham), it’s more or less at the same level as the next tier of clubs.

Like many other clubs, Wolves are sponsored by an online gambling firm in the shape of Sportingbet, whose four-year deal runs until the end of the 2012/13 season and is worth £1.1 million a year, up from £0.9 million the previous season. It is impossible to imagine Wolves securing a deal of the magnitude of Liverpool and Manchester United (£20 million a season), but increasing the money received to £2-3 million is plausible, provided that the club becomes a fixture in the Premier League. Similarly, Wolves announced the biggest kit deal in their history last April, reportedly worth £3 million, after replacing Le Coq Sportif with Swiss clothing brand BURRDA for three years.

However, the accounts point out that trading costs have also increased in line with commercial sales. In fact, total expenditure (including player amortisation and depreciation) has almost doubled in the Premier League from £29 million to £56 million.

Nowhere is the impact on Wolves’ costs of promotion more evident than wages, which have shot up from £17 million to £30 million, an increase of almost 80%, though the important wages to turnover ratio has actually significantly fallen from a worrying 92% to a very respectable 49%, which is one of the best statistics in the Premier League, only bettered by Manchester United. It is obvious that Wolves pay a lot of attention to this key expense, as wages growth was minimal in the Championship, though an injection of money in the last season there did not harm the club’s promotion prospects.

Even with the large increase in salaries, Wolves have one of the lowest wage bills in the top tier with only two clubs below them and one of those (Stoke City) has yet to announce its 2009/10 results, so the chances are that in reality only Burnley spent less on wages last season. Of course, these accounts are nearly a year out of date, closing on 31 May 2010, so Wolves’ current wages are almost certainly a fair bit higher, after bringing in new players and extending the contracts of others like Wayne Hennessy, Kevin Foley and Sylvan Ebanks-Blake on better terms.

The wages league table suggests that there is a high degree of correlation between wages and success on the pitch with the top four places being occupied by Chelsea, Manchester City, Manchester United and Arsenal, but it is no guarantee of success – just look at Portsmouth. That said, there is surely a happy balance to be found between Pompey’s spendthrift approach and Wolves’ extreme caution.

This is the crux of the matter for Wolves’ fans. After all, it’s remarkably easy for a newly promoted club to make a solid profit in the Premier League, as the jump in revenue is so stratospheric. As we have seen, even if the costs are doubled, there is still a healthy surplus available. Of course, it’s equally easy to spend like a demented lottery winner and make a thumping great loss. The challenge is to find that elusive balance of spending sensibly, while not compromising the team’s performance on the pitch.

In fairness, Wolves managed to achieve that last season, but one of the directors, presumably the chief executive Jez Moxey, was richly rewarded for his efforts, as the accounts reveal that the highest paid director received £1.1 million last year, a hefty £515,000 increase on the previous year’s £600,000. That’s not quite as much as Messrs. Gill and Gazidis at Manchester United and Arsenal, but, then again, they are running significantly larger businesses.

"Jez Moxey - keeping the wolves from the door"

Similar to wages, player amortisation has grown a lot, at least in percentage terms, but the £9 million expense is still far behind most of Wolves’ Premier League rivals, who are “paying” for the transfer excesses of previous years. For the uninitiated, amortisation is an “accounting” expense, which occurs as the result of transfer purchases. When a player is bought, the cost is capitalised as an intangible fixed asset and amortised (written-off) over the length of his contract. This means that the costs of buying a player are not fully reflected in the books in the year of purchase, but over time amortisation can have a real impact on the profit and loss account, e.g. Manchester City’s annual amortisation is an astonishing £71 million, and this expense is almost certain to increase again this year at Wolves.

So, rising amortisation would suggest that Wolves have spent some money on buying new players, which is indeed the case. After many years of frugality, the club has splashed out a fair amount of cash recently. OK, we’re not talking massive sums, but the relative change is striking. In the seven years up to 2008/09, Wolves’ net spend in the transfer market (purchases less sales) was just £2 million, but this has shot up to £29 million in the last two years.

That said, they have hardly gone crazy. Chairman Steve Morgan explained the club’s methodology, “What we’re about is getting really good quality players for value for money under the radar. We’ve had some incredibly astute buys in the past.” Indeed, most of the signings could be described as solid, rather than spectacular. Last summer, the newcomers featured Steven Fletcher, whose scoring record in the Premier League is not exactly scintillating, two recruits from relegated Hull City (Stephen Hunt and Steven Mouyokolo) and a couple of Belgians that were not called Steven (or any variant thereof).

Wolves have also made good use of the loan system, most recently securing the services of the dynamic Jamie O’Hara from Spurs, with Chelsea’s Michael Mancienne now on his third loan spell at Molineux.

Given this risk-averse approach, it might surprise some fans that Wolves have actually been among the biggest spenders in the last couple of years. Although there have been a few big money transfers, the majority of clubs have hung on to their cash, so Wolves’ net spend of £29 million during this period is actually the fourth highest in the Premier League, only behind Manchester City, Chelsea and Birmingham.

No wonder Morgan was dismissive of his detractors, “Anyone jumping down my throat, saying ‘we’re not buying players” is talking rubbish. We spent £18 million to make us the third highest spenders in the Premier League last summer, so we spent more than 17 other teams.” Furthermore, in that time, Wolves have twice broken their transfer record with the arrivals of Kevin Doyle for £6.5 million and Steven Fletcher for £7 million.

The club has also invested relatively high sums in its academy, including the £5 million state-of-the-art Sir Jack Hayward Training Ground, which includes a fully accredited sports laboratory, based on AC Milan’s famed Milanello facility. Morgan outlined this vision, “Developing home grown talent remains a key part of our strategy and the number of internationals within our academy ranks is an indication of the quality of players coming through.” Indeed, he believes that the current crop of youngsters is the best in years, maybe even on a par with famous youth players of the past, such as Robbie Keane and Joleon Lescott.

Such player development is important both on an off the pitch. Supporters love nothing more than home-grown talent doing the business for their team, but it’s also good business sense. As the club explained in the results announcement, such players do not appear on the balance sheet as assets, even though they have a significant value in the transfer market.

"Mick McCarthy - always looking on the bright side of life"

In fact, the value of all players is under-stated in the books, because of the accounting treatment. The reputable Transfermarkt web site has estimated the market value of Wolves’ squad to be £57 million, which is much higher than the £17 million included in the accounts. In spite of this artificially low valuation, Wolves’ balance sheet is still very strong with net assets of £70 million and net current assets of £20 million.

So what does the future hold for Wolves?

Well, it’s almost impossible to predict what will happen on then field, but financial projections are thankfully a little easier. In the case of Wolves, I think that we can confidently predict more of the same. Moxey told fans, “We will make a profit again this year, although not as much. We need to make a profit, because we also want to continue to invest in new players.” In other words, revenue will again rise, mainly due to the new TV deal, but costs will also grow, mainly for player investment.

"Karl Henry - likes a tackle"

Moxey re-iterated Wolverhampton Wanderers’ strategy, “We will not be irresponsible and fall into the dangerous trap of over-stretching the club.” This neatly summarised the heartfelt views of the owner, which he explained last year, “It’s important that this club is run for the long term. We want to be around and successful not just this year and next year, but in the future. And the only way you can do that is by managing things properly with a medium and long-term view. Two and two make four no matter what business you are in. You can’t keep hocking your future. It’s like pawning your family silver. Unfortunately, too many football clubs are spending too high a proportion of their income on meeting interest payments and paying wages that they can’t afford, and transfer fees which are unsustainable.”

Running a football club as a sustainable business should be lauded, but the nagging question remains: what would happen if the club were to be relegated?

The financial impact of relegation is identified as the club’s principal risk in the accounts, but the directors state that they would be able to “implement the necessary measures to ensure that the club can continue to operate successfully.” Moxey spelled this out, when he admitted that Wolves would have to sell players if they returned to the Championship, and you would also expect a club as financially shrewd as Wolves to have included clauses in their players’ contracts reducing salaries in the event of relegation.

"Jamie O'Hara - loan star"

Furthermore, the parachute payments paid to clubs dropping out of the Premier league have been increased to £48 million (£16 million in each of the first two years, £8 million in each of years three and four), but it should be noted that this would still represent a drastic reduction for Wolves. They can expect around £42 million distribution from the Premier League this year, so they would have to manage a £26 million decrease in their revenue, which would be a test to say the least.

Relegation is clearly a distinct possibility this season, with the points needed to survive probably higher than ever before, but the plan is to avoid being involved in such battles in future. Indeed, Steve Morgan said that is why they are redeveloping the ground, as he expects his club to become a permanent fixture in the top flight, “It’s more than a dream. I think it is a realistic target.”

If that hope becomes a reality, Wolves might even start challenging for a place in European competitions. They would certainly be well placed to handle the forthcoming UEFA Financial Fair Play regulations, which will force clubs to live within their means, if they are to be allowed to compete in Europe.

"Steve Morgan - building confidence"

Morgan has clearly cast a glance in their direction, as he revealed when commenting on the Torres and Carroll transfers: “To be honest, I think it's nuts and I don't know how certain clubs are going to get through the fair play rules which kick in next season. It just can't be done with transfers like that. To clubs like Wolves, it's completely surreal. It clearly isn't a level playing field, when some clubs can literally throw telephone numbers around and others have to live within our budget.”

There’s no doubt that Steve Morgan is a smart cookie, but some have questioned his commitment, given that he is a Liverpool fan, who tried to buy the Reds in 2004, before arriving in the West Midlands. Morgan himself has stated that Wolves have always been his second team, because he grew up watching them win league titles and the FA Cup. Of course, that criterion could apply to many other teams, but affection for his adopted club does shine through his comments: “I remember the days when Wolves were the greatest club in the land and, although times have changed, we are going to do our best to take Wolves back to where they were.”

"Dances with Wolves"

First things first, the club absolutely has to avoid relegation in order for the strategy to remain on track. On paper, they have a great chance, as their run-in looks easier than their rivals, but the team still has to secure the points required.

Wolves’ performances on the pitch are currently lagging behind the financial results, and their prudent approach may yet come back to haunt them. While it might seem strange to describe a sensible financial strategy as a gamble, that’s exactly what it is in the unforgiving world of modern football, where money talks loudest. The league position at the end of the season will reveal whether it has paid off or not.

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation